March 29, 2024

Economix Blog: Financial Crisis Reading List

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland, and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Andrew Ross Sorkin’s recent business-focused summer reading list leaves out books about the financial crisis to avoid naming his own best-selling “Too Big to Fail.”  This modesty is admirable, but knowledge of the crisis and policy response is essential for understanding today’s economy. The Fed’s current quantitative easing, for example, stems from the crisis, and the debates over financial regulation and housing finance reform reflect the events of the crisis and its aftermath.

Today’s Economist

Perspectives from expert contributors.

There are many worthwhile books on the crisis, with Mr. Sorkin’s volume among the essential reads.  The list below is informed by my experience at the Treasury Department, where I was assistant secretary for economic policy under Secretary Henry M. Paulson from December 2006 through the end of the Bush administration.  I worked on a variety of crisis-related issues at Treasury, many of which I detailed in an April 2009 paper, but not on the transactions related to Bear Stearns, Lehman Brothers and A.I.G. that are the focus of much crisis writing. Even so, obviously I am an interested party, and this list should be considered with that in mind.  Matthew Yglesias provided a crisis reading list from a different perspective in May 2010 and might usefully consider an update.

I think of crisis books as falling broadly into three groups: journalistic blow-by-blow accounts (what Mr. Yglesias calls “tick-tocks”); analytic assessments that sacrifice colorful details for a broader perspective; and screeds with half-baked conspiracy theories and infeasible “magic wand” policy alternatives.  On the latter set, my suggestion is to disregard books that claim that Lehman could have been saved, that losses could have been imposed on A.I.G.’s creditors or that the actions taken during the crisis were a conspiracy or undertaken to save one particular firm. Wrong, wrong, and wrong.  The comments section at the bottom of this Web page provides an outlet for frustration at that assertion.

What Happened in the Crisis

Mr. Sorkin’s “Too Big to Fail” tells what everyone said and did during the crisis, with fascinating insider details of efforts to save Lehman and other failing firms. This book won’t tell you why the crisis happened but is essential for appreciating the frantic pace and harried circumstances under which the response was formulated. Also useful is a September 2009 article in the New Yorker by James B. Stewart that focuses on the “Eight Days” of Lehman’s death throes.

In his memoir “On the Brink,” former Treasury Secretary Henry M. Paulson concludes that the efforts he led succeeded in stabilizing the financial system, even while acknowledging various hiccups. I’m far from unbiased, but I think this conclusion is right.  Policy makers faced the prospect of a financial collapse when short-term money markets locked up after Lehman’s failure, and wrapping the government’s metaphorical arms around banks averted catastrophe. No amount of positive return on the TARP investments will quell criticism of the interventions, but Mr. Paulson in his book is forthright about the trade-offs involved.

The slim “Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager” written with Keith Gessen captures the struggles of the anonymous co-author in dealing with the crisis while trying to understand and adapt to the evolving government response.  This mini-M.B.A. course of sorts gives an accessible introduction to financial markets and the securities into which mortgages were bundled.  This is the book I suggest to students looking for an introduction to Wall Street and the crisis.  “The Big Short,” Michael Lewis’s book about investors who saw the crisis coming, is enormously entertaining but narrower than “Diary.”

Causes of the Crisis

The second category of book helps readers understand the factors behind the crisis, the policy response and its aftermath. A first stop for readers is the dissenting report by three members of the Financial Crisis Inquiry Commission (Keith Hennessey, Douglas Holtz-Eakin, and William Thomas) that zeros in on the key causes of the crisis. With these 27 pages as background, the book-length treatments below provide full analysis.

Fault Lines,” by the University of Chicago professor Raghuram Rajan, is an economic tour de force that shows how economic and social factors converged to bring about the crisis. As I noted in a 2010 review, Professor Rajan explains that Americans borrowed too much, enabled by financial innovation and seemingly generous foreign lenders, with contributions from weak regulation, faulty rating agencies, out-of-control executive compensation and widening income inequality.

Roger Lowenstein’s “The End of Wall Street” mixes explanation with journalistic anecdote. The story about the former Citigroup chief executive Vikram Pandit’s discarding of expensive wine makes the book worth reading all by itself, but Mr. Lowenstein gives readers both the fun tidbits and insightful analysis.

Assessing the Full Financial Crisis Policy Response

A problem with the selections listed above is that they stop too soon, covering the period through the introduction of TARP in late 2008 but not much beyond.  Neil Irwin’s fascinating “The Alchemists: Three Central Bankers and a World on Fire” goes through 2012 but is narrowly focused on monetary policy and misses out on much of the policy action at the Treasury and White House under Presidents Bush and Obama.  Alan Blinder’s “After the Music Stopped” is comprehensive in covering the financial crisis and ensuing recession, but the analysis has a mild yet noticeable partisan flavor.

Future memoirs from Timothy Geithner and Ben Bernanke might fill in some of the gaps and eventually take their place on the list of essential crisis books.

I suspect that authors covering the broader sweep will note the remarkable continuity of crisis efforts across the two presidential administrations. Policies to stabilize the financial system included the TARP capital injections into banks, debt guarantees from the F.D.I.C. and targeted interventions into particular markets and industries by the Fed and the Treasury Department. These latter efforts stabilized money market mutual funds (including actions by the Treasury and the Fed); commercial paper markets (Fed); securitized lending (Treasury and Fed); the auto industry (Treasury); and individual entities like A.I.G., Citigroup, Bank of America, Fannie Mae and Freddie Mac (Treasury and Fed).

In a Feb. 24, 2009, address to Congress, President Obama said that he was “infuriated by the mismanagement and the results” of the assistance for struggling banks. And yet the financial rescue programs listed above were begun before Jan. 20, 2009, and continued by the Obama administration.  On top of these efforts would be added the quantitative easing purchases of Treasury bonds and mortgage-backed securities first announced by the Fed in late November 2008 and now in a third round.  The early 2009 fiscal stimulus was an Obama innovation, but its effectiveness remains the subject of considerable debate.

President Obama has received considerable criticism lately for continuing a range of Bush-era security policies.  An irony, then, is that this observation applies as well to the financial policy crisis response. As detailed in the books above, these efforts did not head off the Great Recession, but on the whole they succeeded in stabilizing the financial system and avoiding an even worse catastrophe.

Article source: http://economix.blogs.nytimes.com/2013/07/15/financial-crisis-reading-list-2/?partner=rss&emc=rss

Investors Scrutinizing JPMorgan’s Mortgage Bonds

Lawyers representing investors that settled billions of dollars of mortgage bond claims with Bank of America last summer announced on Friday that they had opened investigations into $95 billion worth of mortgages held in JPMorgan Chase securities.

The investors are concerned that there were mortgages put inside those securities before the housing bubble burst that were subpar from the beginning, and they are investigating whether JPMorgan should repurchase those loans.

JPMorgan is among the banks with the most mortgage-related litigation and claims, having inherited much of its exposure from its acquisitions of Bear Stearns and Washington Mutual, which both ran into trouble partly because of troubled mortgages. Of the 243 mortgage bonds at JPMorgan that the investors are targeting, at least half were created by Bear Stearns or Washington Mutual.

For the banking sector in general, mortgage bond investigations have left a looming question mark over the industry’s prospects. Banks face investigations and potential litigation from private investors as well as state attorneys general and also from the Federal Housing Finance Agency, which oversees the mortgage financing giants Fannie Mae and Freddie Mac.

The potential dollar cost of the mortgage mess has kept growing this year; many analysts estimate it may be more than $100 billion for the industry. But as a team of bank analysts at FBR, a firm in Arlington, Va., put it in a report that estimated the liabilities: “Does anyone really know?”

For banks, the continuing doubts about their old mortgage businesses also makes it difficult to move on with new mortgage origination, because the companies may be concerned about the way they describe new mortgages in filings, analysts say. The lack of lending, in turn, is seen as a drag on the economy.

“It is inhibiting people from lending,” said Tom Cronin, a managing director of the Collingwood Group, a housing consulting firm in Washington. “You’re only going to make the very best loans, if you don’t know how enforcement is going to be handled.”

Joseph M. Evangelisti, a spokesman for JPMorgan, declined to discuss the bank’s mortgage liability exposure in depth, saying only: “We stand by our obligations under the agreements in question and we will honor our obligation to repurchase any loan that should be repurchased under the terms of those agreements.”

Banks like JPMorgan have benefited in recent years from the slowness of investors to investigate the bonds they bought before the financial crisis.

Under the terms of those bonds, investors who own small slivers of mortgage bonds — as most investors do — have been stymied from obtaining much data on the mortgages within the deals. The rules vary for each bond, but typically banks have to turn over detailed information only to investors who own more than a quarter of a bond. That has meant that large investors like Pimco, BlackRock and even the Federal Reserve Bank of New York have had to combine their interests to cross that threshold.

Many of the investors are coordinating their efforts through Gibbs Bruns, a law firm in Houston. That firm announced its plans to investigate the 243 JPMorgan deals on Friday.

It was also that firm that struck an $8.5 billion settlement with Bank of America to settle similar issues with $424 billion of mortgage bonds in July, though that settlement has yet to be approved by a court.

Gibbs Bruns did not return requests for comment.

It will most likely take months for the investors to determine how much money they think they are owed, but when they do, they may try to reach a settlement with JPMorgan or they may take the bank to court.

JPMorgan is currently in litigation with the Federal Deposit Insurance Corporation over the terms of its deal to acquire Washington Mutual, and it is unclear if it would be the F.D.I.C. or JPMorgan that would pay out on claims related to the failed bank’s mortgage bonds.

JPMorgan has set aside billions in reserves to cover mortgage-related litigation, according to a recent company presentation.

If the bank settled with the investors using the same loss ratio that was applied in the Bank of America settlement, it would cost JPMorgan about $1.9 billion. Still the bank would have other exposure outstanding. JPMorgan faces about $31 billion in class-action cases, according to McCarthy Lawyer Links, a legal consulting firm.

Elizabeth Nowicki, a professor of securities law at Tulane University and a former lawyer at the Securities and Exchange Commission, said that the efforts by investors might turn out to be the costliest and most important way that banks are held accountable for their mortgage security creations, because the push for accountability is coming from bank clients. For instance, in the one mortgage security case the S.E.C. has brought against JPMorgan, the bank settled the allegations in June for $153.6 million.

“I think this is going to have much more of an impact in terms of fear and Wall Street sort of shaking in its boots than anything the S.E.C. or Congress can do,” Ms. Nowicki said.

“Without a confident client base, the banks can’t make any money, and now that the client base is really trying to probe into these packages to see what really went on, they are going to have to give some answers.”

Article source: http://feeds.nytimes.com/click.phdo?i=31bbe6c3b9b534200c484374168a0f9a